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A bit of background on today’s column

December 28, 2007 1:49 pmDecember 28, 2007 1:49 pm

It occurs to me that some readers might want to know a bit more about the history behind what I’m saying currently on trade.

Back in the early 90s there was a sort of shift in focus in trade discussion. Until then, Japan had been the big boogeyman — remember Rising Sun? But the scariness of Japan was starting to fade, and concerns about the impact of third-world competition started rising to the fore.

Unlike the Japan panic, these concerns had solid economics behind them. The Stolper-Samuelson theorem, which is basic textbook economics (very much including my own textbook) (PowerPoint), says that trade between countries with very different factor endowments — e.g., one country has a much higher ratio of skilled to unskilled workers — can have large effects on income distribution, and leave large groups worse off.

But that’s an argument in principle; how big was this effect in practice? I and others took several stabs at this; in particular, I wrote a 1995 paper (big pdf) concluding that the effect was real but modest, basically because imports of manufactures from the third world were fairly small compared with GDP.

It was, in other words, a quantitative argument, not a rejection in principle of concerns about the effect of trade on wages.

Time has, however, moved on. The last big attempt to estimate the wage effects of trade, by Bill Cline, was published in 1997 but used data only up through 1993. Since then trade has both gotten a lot bigger and increasingly focused on very low wage countries. Hence the need to revisit the subject.

Maybe there’s a way out of the uncomfortable conclusion that the income distribution effects of trade have gotten a lot bigger. But the point for now is that applying the same approach I and other used a dozen years ago to say that these effects weren’t a big deal now yields different results. And I’ve always tried to avoid being one of those people who keeps changing arguments, but always arrives at the same conclusion.

Let me suggest that you may be overlooking some signs that globalization is also damaging the compensation and job prospects for higher-paid workers as well.

Software programmers are the canaries in the globalization mine-field, to mix metaphors.

IT jobs are projected to boom in the next decade; yet projections for programmers are fewer jobs and flat to down pay. Programming requires more skill and more training then network administration; yet jobs and compensation for admins will boom, probabably passing those of programmers. Why? For now, admins have to be close to the users and are harder to offshore.

The other issue is that IP (intellectual property) is being off-shored along with jobs.

Witness the revelation in the Microsoft-Google law suit of Kai-Fu Lee that MS CEO Steve Ballmer had agreed with the Chinese government to export 1,000 jobs from MS headquarters in return for access to markets. The Chinese want computer technology and are actively using trade restrictions to demand it; while multinationals that are supposedly U.S. companies are quite happy to export technology, much of it paid for by U.S. taxpayers.

Your Lenovo example is NOT representative: IBM, Cisco, HP, Microsoft, Intel and more are setting up R&D in China, India, Eastern Europe not only to save money by exporting highly-paid highly-skilled jobs, but to curry favor with local governments.

This isn’t free trade: It is managed trade where other government DEMAND high-skills jobs and IP paid for by U.S. taxpayers (either directly or through R&D tax credits) in return for market access. The Multinational CEOs get rich, the U.S. loses not only jobs but future competitiveness.

The liberal argument for free trade traditionally has at least 2 prongs 1) it helps the domestic population more than it hurts and 2)it helps poor people in foreign lands. you started to take on the 1st prong, but what does the empirical evidence tell us about the 2nd?

Also, there seems to be an underlying assumption that pareto optimal transactions are always good. however, its not always clear that giving more to the rich even if nothing is taken away from anyone else is a good thing because of the effect that wealth concentration has on policial processes as well as the consequence that relative status (wealth) is a good itself.

I believe our host’s recent book touches on the domestic political side of these issues.

I am surprised that environmental considerations are completely absent from Paul Krugman’s discussion of “free” trade issues. Certainly we must be aware that trade with countries with much lower wages and worker standards has a detrimental effect on our own labor force. However, we should also be concerned with the environmental standards, or lack of them, of trading partners. Many products can be made cheaper if one doesn’t care about the environmental cost of their production. For example, using energy from a dirty coal power plant is cheaper than less polluting alternatives. Given that we are facing a planetary climate crisis, Mr. Krugman should certainly take this factor into his analysis of what should be considered beneficial trade.

Don’t you think this needs to be coupled with a discussion of how illegal immigration has depressed wages for many lower tier workers? Both trade and illegal immigration provide a way for sellers to reduce the cost of their product. And both outsource labor, in the one to a foreign country and the other to foreigners in this country.

I read your column today, and I was glad you found a way to quantify what we can all feel, and see.

A couple of points please:

You seem to be taking in only manufactured items, and not services. What about wage pressures on those services being imported? Any intellectual knowledge that can be digitized can now be imported. Reading x-rays, engineering, tax preparation, Software. The list is endless.

And what will you do about a safety net? I know first hand about software. I spent five years learning to write in six languages, only to find that when I graduated the jobs has disappeared. What was supposed to be a secure job for generations to come had gone. Things change too fast for laws that are safety nets. And how would you structure that law, to include not only those who lost a job, but spent their own money, and valuable time for an education for a job which vanished.

And you do not have to take my anecdotal evidence. Try doing a study, on the enrollment in community colleges in courses on writing software. And I suggest not doing day school which is filled with kids hoping to get jobs, but who are misguided, but in the adult continuing education courses. That is where industry sends its people who need training to night school, because they are already working. And it is where people who know the job market go, because they are working, go to get the skills they know are needed to help them adjust.

I think you will find the numbers to illustrate my point.

Interview the night school teachers, usually they work in the field, unlike “the day professors”. They will tell you, their work gets outsourced.

What is left for America, is the jobs that require hands on attention. Nursing/medical, education (for how long), flipping burgers, stocking shelves in Wally mart, Driving trucks, etc..

The mea culpa is welcome, but why did you need a “practice run” to break the illusion that globalization would somehow draw a line at nations with similar factor endowments?

The impetus to cut labor costs is about as recherche as the sex drive. And as for how low firms could go in their race to the bottom, the “Rising Sun” scare itself embodied the sobering realization that “Made in Japan” — once a synonym for “shoddy” — had become a mark of quality. Could “Made in China” be far behind?

Whenever I hear economists talk among themselves about Pareto optimality, my first thought is of parroting optimists trading squawks from nice cages. To borrow a phrase from someone whose name escapes me but whom I read regularly, isn’t it time that economists got over some of their big table fantasies?

I’m not entirely sure what new ideas you are bringing to the big table other than being a critic. I look forward to more engaging commentary.

Paul,

“Maybe there’s a way out of the uncomfortable conclusion that the income distribution effects of trade have gotten a lot bigger.”

In light of these increasing redistribution effects, does this change at all your argument in Conscience of a Liberal that the weight of political climate is greater than international trade? Does the literature do justice to how 1st/3rd world trade effects income distribution as a function of, say, a worker’s education?

The problem that America faces is not merely the loss of low and midrange jobs, but the loss of our industrial base, much of which is now abroad. It is simply not true that our “superior” technologists can design products for manufacture abroad, and that we can trade the results of their skills along with the fruits of our advanced service sector for the vast amount of goods we import.

First, it is difficult to develop innovative products without direct, hands-on connection to manufacture. Second, countries like China and India have scientists and engineers just as talented as ours (and are graduating far more every year than we do), and these technologists have the manufacturing base to work with. The technologies of these countries are becoming increasingly sophisticated, not only in manufactured goods, but in the service sector as well. They are eating our lunch, as evidenced by the huge trade imbalance and the rapidly shrinking dollar.

The solution is not tariff barriers, but a re-industrialization of America through a major program of innovation. We can compete with low foreign labor costs by vigorous use of automation in new, modern industrial plants. Such a program will take much R&D and much capital investment, and requires a consortium of business, university, and government leadership to implement a well thought out program.

If we do nothing the American living standard will decline, not only for the uneducated, but for university graduates as well.

I am very dissapointed with the conclusion of your column today. You are not taking into account that every job in the third world is keeping a person or maybe a whole family to migrate to an advanced economy either legally or illegally with the traumas that this entails. And this obviously has effects on the developed countries safety net.
I thought one conclusion about trade was that it was a way of equalizing wages across countries (advanced and poor) without having to open the borders for labor (as they are open for capital.)
If you are not advocating for proteccionism and your only worry is the “american safety net” I think you didn’t make your argument clear enough.

“But workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition.”

I have a bs in math & physics, and ms in comp. sci, as well as an mba. I’ve definitely seen “my jobs” shipped overseas and seen wages stagnate and fall.

“Luckily”, in quotes because it’s actually a tragedy, I can get relatively secure work by working in defense building things that are poorly tested and probably of not a whole lot of use.

I’m somewhat stuck in defense since so many other jobs have fled, and because pension and health care do not follow me from job to job.

What I would prefer to do, is what I used to do 10-15 years ago, which is to work for a variety of smallish companies working on more interesting, more likely to succeed, more likely to be meaningful projects.

Your solution to wage imbalances suggesting that we start “doing things like strengthening the social safety net” is a flight from reality. If your wage costs are driving you into bankruptcy you must either reduce your wage costs or increase your productivity. Going on the government dole is only going to exacerbate the problem and put off the day of reckoning. Individuals always suffer when unwanted change is thrust upon them but change is essential to economic survival. The market has a much better record of success than the central planners.

I don’t see how you reach the conclusion regarding the magnitude of the effect of imports of manufactured goods from developing countries on wages in the US. A majority are losers? The Bureau of Labor Statistics reports that manufacturing employment fell from roughly 17 million in the mid-1990s to 14 million in 2006. That’s a reduction of 3 million manufacturing jobs over ten years–300,000 per year on average–in a total labor force of 136 million people.//www.bls.gov/webapps/legacy/cesbtab1.htm

Could you please explain how this relatively small displacement has a large wage impact on a majority of workers? I see how it can have a small impact, especially if we assume the demand for unskilled workers in the non-traded sector is constant. But I don’t see how it can have a large impact that is not swamped by the falling goods prices for non-traded goods sector workers (Lawrence is good on this). So, I understand the direction but not how you arrive at the magnitude of the relationship between imports and wages.

If there were a prize for the economist most interested in testing his theories against real-world data, you would not have much competition. Still I don’t see recognition of certain trade facts–of the 500 pound gorilla variety–that no theory addresses satisfactorily.
Most economists argue that balanced trade is good for a trading nation. Some argue that sometimes an export surplus is even better for a trading nation. But I have never heard it argued that a trading nation benefits from running a chronic trade deficit. So why has the fact of America’s chronic large deficit not caused us to conclude that our trade policy is fouled up?
I guess New Trade Theory and Old Trade Theory and Every-Other Trade Theory predict that all trade deficits will eventually turn into balanced trade through market adjustments in currency exchange rates and factors of production. But when “eventually” is so many years that the deficit becomes a substantial fraction of GDP and national wealth, how can we ignore the facts and patiently wait for equilibrium? While we wait, families are crushed, foreign affairs policy options are limited, and society is transformed–not necessarily in a good way. Furthermore, the theories predict only that the net outflow of wealth will eventually stop–not that it will reverse and restore the status quo ante.
Isn’t it true that all theories about trade are too rudimentary to be useful because they do not account for the facts that real trade deals are characterized by cupidity, stupidity, and political distortion and that real currency markets are manipulated by governments and others who can?

In addition to the concerns of the first three comments, I would add the cost of literally taking land from indigenous peoples, who sometimes end up dead, defending their land. Then, as noted above, the land, air, and water are often razed and poisoned, leaving those who are dependent on the bounty of the land to become ill, and eventually migrate to an unfamiliar urban existence. The rich countries then lay claim to the patents from discovered medicines in what little is left of that forest. GMO plants take over the planet. Plantations are considered “forests.” I’ll rant no more tonight, but there is much left out of the equation.

All this goes along with the problems of our own struggling middle class.

I admire Mr. Krugman, and am extremely glad to have him contributing his thoughts to the world, but I, too, believe there is much going on in “free” trade that is criminal, in the worst sense of the word.

I agree with the conclusions in the column the other day — (1) protectionism is bad but (2) we need better social supports in order to distribute the benefits of trade more evenly.

It would be nice, though, if you could expand a bit more on (2). Exactly how should that be done? I imagine providing health care benefits that are not connected to a job would be a tremendous help. Perhaps more generous unemployment benefits. But is there anything else that can be done? Job training is always promoted by politicians, but my impression is that there is precious little evidence that it’s effective. Anything else?

I am far from being an economist, but I am wondering why I am just about the only one who complains about the lack of a level playing field on the world labor market for our workers. The built-in unfairness of having to compete worldwide with workers from other countries (ALL other countries) that provide government-sponsored healthcare for all of their citizens is something that cannot be overcome by our workers accepting lower pay and giving back other job benefits, such as right to pensions. We, in the richest country in the history of the world (maybe, I am no historian, either), and we are told we can’t afford to provide healthcare as a basic human right.

The Clintons, bless them, –I wish that I could like them as well as I used to, and, believe me, I have tried, are–between the two of them– are responsible for a lot of the problems of our whole working class. She, with the failure of her health care program, and he with pushing NAFTA in spite of the fact that we had no government-sponsored healthcare except for the elderly and for veterans.

What profit-conscious capitalist would not send the jobs to a place where he/she would not be expected to pay for healthcare of workers?

In your piece yesterday you chide those who criticize free-trade skeptics with lectures about economics. Ironically, I just picked up “Pop Internationalism” two days ago and that is what you do quite a bit of in thsoe essays. Your critique was partially about magnitude, but also about economics and you are quite harsh on Reich, Tyson, Thurow and others. And rightly so.

Ten years later you are moderating your disdain for those who disagree with you on this issue. Perhaps ten years from now you will also have moderated your rhetoric when it comes to those on the other side of the aisle.

Your piece yesterday proves that political issues are complex and dynamic. Understanding that is the first step toward a less venomous and more respectful discussion of difficult issues.

Sash: Well, there’s a big issue there, too. In a lot of third-world countries, the already-awesome difference in power and wealth between the upper and lower classes (there’s often not much of a middle) allows for their upper classes to reap most of the benefits, too. The poor still go along with things because they have no other choice–local products are “dumped” out of existence by foreign economies of scale, and subsistence farmers are forced off the land–but they don’t benefit anywhere near as much as the elites.

You end up with a perfect storm for elites: first world elites benefit because of the price differential of labor, and third-world elites benefit because they can create the subcontracting businesses that serve as middlemen, with the poor being (generally) too powerless to say or do anything about it.

I bet you will move further to the left as yet more numbers bear out that the “free trade” regime delivers net benefits only to a few in China/Mexico/Bangladesh, and a very very few in the U.S. The rest of us get stuck holding the bag.

It’s really amazing to see a pundit who will admit when they were wrong, show how they were wrong, re-evaluate based on evidence, and change their position. Keep up the awesome work… and please keep on movin’ to the good side of the force!

Although conceding that the effect you identifies must actually happen, I have doubts about it’s magnitude. Besides, I suspect that in many cases exports from third world countries only contributes to redistribuctive effects inside developed ones.

I have just read an interesting paper from UBS investiment’s Jonathan Anderson, titled “Is China Export-Led?”, where, simply put, he calculates the % of added value to chinese exports. He finds that it amounts only to slightly less than 10% of the chinese GDP, and this compares bad with the assumed figures of 40% of GDP.

Now, I can be wrong, but I think that this means that most times the chinese are repackaging high-value merchandise made abroad. According to CIA factbook, the bigger import partners from China are: Japan 14.6%, South Korea 11.3%, Taiwan 10.9%, US 7.5%, Germany 4.8% (2006). And the bigger export partners are: US 21%, Hong Kong 16%, Japan 9.5%, South Korea 4.6%, Germany 4.2% (2006). Yet total China exports are $969.7 billion f.o.b., and total imports, $751.9 billion f.o.b., what means that there is a value transfer, at the end of day, from the USA to Japan, South Korea, Taiwan, Germany and some sectors of USA economy, by means of chinese imports.

Mr. Krugman, whom I admire and agree with on a lot of matters has made it clear (to me, at least) in recent tv and print interviews promoting his book that he is a Roosevelt (FDR) liberal, and states explicitly that he wants to see a restoration of The New Deal’s outlook and (types of) programs carried forward. So, I’m not surprised that he doesn’t touch on the environmental question when talking about trade, nor am I surprised that he doesn’t chafe at the rigged nature of global free trade for the benefit of the very few, but still sees globalization of “free trade” to be a plus.

I’m a bit disappointed in all this from him, to be honest.

I’m hearing a good liberal voice, but one that seems oddly stuck in the past?

The problems with Krugman’s “my owm textbook” and the Samuelson and other Economists that he quotes is that these are more equations in a non-reality and in a simplified model environment. This is why the conclusions are not realistic to what is taking place. The actual and complex forcasts of the variety of issues involved can only be entered through complex Operations Research equations (and can even the outcome of these can be believed).

Krugman’s column,Dec.28, points out that under our trade with LDCs our educated workers gain i8n both higher incomes and reduced cost of living, while the non-elite majority suffer reduction in wages or actual lossd of jobs. I agree with that analysis –but with two qualifications.
First is the small scale of the present imports from LDCs:from 2.5% of U.S. GDP in 1990 to just 6% in 2006. Secondly and more permanently, the disparity between those two groups of workers is inherent within market economies, aside from international trade. Our highly-educated workers — who are alost always in short supply — togtether with other kinds of highly-paid workers (mostly unionized) have regularly exploited the rest of the population, by way of relatively high prices for their product or services (e.g., lawyers or financiers, and steel or auto workers).
Can we remedy such built-in exploitation? To make wages uniform for all workers is presumably anathema in a competitive, upwardly striving society. Krugman’s suggesion, to “strengthen the social safety net”, would be a very expensive device, and would perpetuate dependency, if applied fully.
All the above is separate from the harmful impacts of our “free-trade pacts” upon our LDC suppliers: we sell them American grain at subsidized cut-rate prices that ruin their peasant farmers, while we pay bare-bones prices for their exports!